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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1012719059255

Ruling

Subject: Deceased estate

Question 1

Will the Commissioner exercise the discretion under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) to tax the income of the trust estate under section 99 of the ITAA 1936?

Answer

Yes.

Question 2

Is the trust estate entitled to the franking tax offset in respect of the franking credits it receives on dividends for the year ended 30 June 2015?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The deceased passed away in early 20XX.

The deceased was director, secretary, public officer and investor in a number of private companies who were investing in property.

The executors of the estate have had the tasks of taking control of these companies, selling the properties and otherwise realising the assets of the companies and returning funds to the shareholders.

The executors have also had to deal with the repayment to creditors of one company that was insolvent.

The estate expects to receive fully franked dividends.

The executors have not lent money to others.

There have been no assets transferred into the estate.

There are no special rights or privileges attached to the property of the estate.

The deceased estate is of the ordinary and traditional kind.

The estate resulted from a will.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 99.

Income Tax Assessment Act 1936 Section 99A.

Income Tax Assessment Act 1936 Section 101A.

Reasons for decision

Sections 99 and 99A of the ITAA 1936 apply to assess the trustee on income to which no beneficiary is presently entitled, which is retained or accumulated by the trustee. In considering these sections, we must first consider section 99A.

Section 99A of the ITAA 1936 applies in relation to all trusts unless: 

Subsection 99A(2) of the ITAA 1936 outlines the circumstances when the Commissioner may apply his discretion for section 99A of the ITAA 1936 not to apply. The relevant part of subsection 99A(2) of the ITAA 1936 states that the discretion may be exercised where a trust estate resulted from a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil. The discretion is exercised where the Commissioner is of the opinion that it would be unreasonable for section 99A of the ITAA 1936 to apply. 

Consequently, the favourable exercise of the Commissioner's discretion under subsection 99A(2) of the ITAA 1936 means the highest rate of income tax does not apply to trust estates resulting from a will, codicil, etc. These include both the estate of a deceased person and 'testamentary' trusts established pursuant to the terms of a will.

If no part of the net income is distributed to beneficiaries, and section 99A of the ITAA 1936 is considered not to apply, then the trustee is assessed under section 99 of the ITAA 1936 as if the income were that of an individual.  

In forming his opinion about the exercise of the discretion, the Commissioner must have regard to the matters outlined in subsection 99A(3) of the ITAA 1936. With respect to matters relating to a deceased estate, the Commissioner must examine situations where an attempt is made to increase the assets of the trust by, for example, granting of special rights or privileges to the trust, the transfer of the property to it, or the making of loans to it.

It is the Commissioner's general practice to exercise the discretion under subsection 99A(2) of the ITAA 1936 and assess the income of a deceased estate trust under section 99 of the ITAA 1936 unless there is tax avoidance involved. Deceased estates of the 'ordinary and traditional' kind (whose assets come directly from the assets of the deceased) are assessed under that section. 

In your case, the trust resulted from a deceased estate and the assets were held at the date of death. There are no other suggestions that the manner in which the trust was created was for any reason other than the ordinary and traditional kind.

Therefore it is reasonable for the Commissioner to apply his discretion to allow section 99 of the ITAA 1936 to apply and the trustee to be taxed at ordinary marginal rates.

Franking tax offset

Assessable income of a deceased estate includes income from all sources received by the estate after the death of the deceased.  Such income could consist of salary and wages, any leave payments and eligible termination payments, investment income, etc. 

These types of income are assessable in the hands of the trustee if no beneficiary is presently entitled under section 99 or 99A of the ITAA 1936.

Section 101A of the ITAA 1936 provides for the assessment of an amount received by the trustee of the estate of a deceased person where the amount would have been assessable income of that person had it been received during his or her lifetime. In other words, the trustee of the deceased estate assumes the role of the deceased taxpayer for taxation purposes.

The trustee of a deceased estate is entitled to use the franking credit on franked dividends paid to the estate after the death of the deceased, so as to reduce the tax bill for the deceased estate or to pass the franking credit to a beneficiary if a dividend is paid out to a beneficiary during the course of administration.

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